Banks Revamp Loyalty Programs to Retain Customers

Banks have long used loyalty programs to reward customers and drive retention, but increased competition from within and outside the banking industry is forcing changes to the way these programs operate. The emphasis on customer retention is more critical than ever according to a new Forrester Research study, New Bank Rewards Programs Improve Customer Retention."

"This is a time when consumers will decide if they want to stay with their bank or not," says Mary Pilecki, a senior analyst at Forrester. "Wal-Mart is working toward the banking path, Home Depot wants to offer home equity loans, and H&R Block wants to offer savings accounts. The competition is coming from all sides and it's all about growing, but before you do that you have to hold on to what you have."

Keys to success Any successful rewards program needs to be easy to understand, easy to redeem, and has to make customers want more rewards. One way banks are accomplishing these tasks profitably is by rewarding certain actions over others. "Loyalty programs are effective as retention tools because they not only help retain due to interest and value, but they allow banks to drive behavior," Pilecki says.

Some banks give customers more points for making deposits at an ATM instead of a teller, and others reward customers for using a debit card as a credit card transaction instead of entering a PIN. In both cases the customer wins and the bank wins, either because teller staffing can be reduced or because the bank can collect higher fees from retailers on a credit transaction, Pilecki adds. "It's a two-way benefit because customers get something that interests them, and you're finding ways to save money by driving behavior," she says.

One example of a bank Pilecki cites as driving behavior through a loyalty program is National City. It allows members to pool points with other customers in their household, so a family could save points together for something like a big screen TV. The bank also gives out points carefully to achieve specific objectives. "When you open a new mortgage loan you get a lot of points, you get points for adding a direct deposit to your account, but you don't get any for signing up for online bill pay," Pilecki says. "You get those points when a bill is actually paid online. That way you're being rewarded for actually using the bank's services."

The future Pilecki recommends that other banks consider adopting National City's pooled points approach. Forrester's report offers a number of other suggestions to increase customer choice and flexibility: allowing customers to use points toward transaction fees, offering multiple cards, asking customers what they want in a loyalty program, and letting them choose the specifics of their rewards program.

Whatever program a bank chooses, however, customer retention should also include some sort of relationship-based pricing (RBP), the report emphasizes. "You should price dynamically per transaction based on the value of the customer," Pilecki says. "You might waive a fee because of value, or give a better rate on a mortgage, which a customer who doesn't want to do a lot of haggling will see as one of the nicest things that can happen. All the loyalty programs we see now are stop-gap measures as banks ultimately move toward an RBP model."